Credit: China’s regulatory calibration


Focus on quality and better-rated developers
Chang Wei Liang19 Nov 2021
    Photo credit: Unsplash Photo


    China’s real estate credit pricing continued to improve this week on expectations of further finetuning in regulatory policy. Besides last week’s news of relaxing access to bond financing (see DBS Macro Strategy - Twists and turns in China credit, 12 Nov 2021), China is now planning to allow “high quality” developers to resume issuance of asset-backed securities, ending a freeze that began in August. China is also reportedly planning to relax rules limiting new interbank bond issuance to 85% of outstanding interbank debt, albeit for “high quality” issuers only. Without guidance on how stringent (or lenient) regulatory metrics for quality are, better rated credit enjoys greater certainty, and should see a larger easing of volatility compared to highly leveraged names.



    In fact, volatility in China USD real estate credit had turned extremely elevated since September, as liquidity risks keep spiralling with more developers defaulting, or requesting for debt swaps. Our China real estate DACS subindex widened and narrowed by 50-60bps in just the last 8 weeks, before spreads finally came off on reports of regulatory easing last week. Reports of some key Chinese developers raising liquidity through sales of listed subsidiaries or share placement have reduced short-term default risks as well. Despite an improvement in sentiment, a sharper spread compression for China real estate credit may have to await a rebound in property sales. The regulatory relaxation in credit alone does not mean long term risks have completely abated. This will depend on whether there is any substantive impairment of developers’ inventories going forward.

     

    Chang Wei Liang

    Credit & FX Strategist
    [email protected]
     
     
     
    Subscribe here to receive our economics & macro strategy materials.
    To unsubscribe, please click here.

    The information herein is published by DBS Bank Ltd and/or DBS Bank (Hong Kong) Limited (each and/or collectively, the “Company”). It is based on information obtained from sources believed to be reliable, but the Company does not make any representation or warranty, express or implied, as to its accuracy, completeness, timeliness or correctness for any particular purpose. Opinions expressed are subject to change without notice. This research is prepared for general circulation.  Any recommendation contained herein does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. The information herein is published for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. The Company, or any of its related companies or any individuals connected with the group accepts no liability for any direct, special, indirect, consequential, incidental damages or any other loss or damages of any kind arising from any use of the information herein (including any error, omission or misstatement herein, negligent or otherwise) or further communication thereof, even if the Company or any other person has been advised of the possibility thereof. The information herein is not to be construed as an offer or a solicitation of an offer to buy or sell any securities, futures, options or other financial instruments or to provide any investment advice or services. The Company and its associates, their directors, officers and/or employees may have positions or other interests in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking or financial services for these companies.  The information herein is not directed to, or intended for distribution to or use by, any person or entity that is a citizen or resident of or located in any locality, state, country, or other jurisdiction (including but not limited to citizens or residents of the United States of America) where such distribution, publication, availability or use would be contrary to law or regulation.  The information is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction (including but not limited to the United States of America) where such an offer or solicitation would be contrary to law or regulation. 

    This report is distributed in Singapore by DBS Bank Ltd (Company Regn. No. 196800306E) which is Exempt Financial Advisers as defined in the Financial Advisers Act and regulated by the Monetary Authority of Singapore. DBS Bank Ltd and/or DBSVS, may distribute reports produced by its respective foreign entities, affiliates or other foreign research houses pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the report is distributed in Singapore to a person who is not an Accredited Investor, Expert Investor or an Institutional Investor, DBS Bank Ltd accepts legal responsibility for the contents of the report to such persons only to the extent required by law. Singapore recipients should contact DBS Bank Ltd at [email protected] for matters arising from, or in connection with the report.

    DBS Bank Ltd., 12 Marina Boulevard, Marina Bay Financial Centre Tower 3, Singapore 018982. Tel: 65-878-9999. Company Registration No. 196800306E. 

    DBS Bank Ltd., Hong Kong Branch, a company incorporated in Singapore with limited liability.  18th Floor, The Center, 99 Queen’s Road Central, Central, Hong Kong SAR.

    DBS Bank (Hong Kong) Limited, a company incorporated in Hong Kong with limited liability.  11th Floor, The Center, 99 Queen’s Road Central, Central, Hong Kong SAR.